In a recent decision, OHA ruled that the ostensible subcontractor rule requires a two-prong evaluation before SBA can find affiliation. The SBA Area Office took a look at only one prong, which resulted in a remand from OHA. Ultimately, OHA found affiliation, reversed the SBA Area Office and found the concern ineligible. As OHA made clear, entities can’t fix deficiencies after the fact.
Think of the ostensible subcontractor rule like the preferred go-to move (other than line dancing) at a Country/Western Dance Hall, it is the ostensible subcontractor two-step. Follow along as I lead you through the dance you need to get right to avoid stepping on the toes of your proposal.
In June, 2020, The VA issued a solicitation seeking a contractor to perform construction projects at the Lexington VA Medical Center. The VA issued the solicitation as a 100% service-disabled veteran-owned small business (SDVOSB) set-aside. Indigo Blue Construction, LLC (Indigo) and Contego Environmental, LLC (Contego) submitted proposals. Indigo was awarded the contract, and Contego protested, alleging that Indigo was not a small business under the terms of the solicitation.
The SBA Area Office investigated, and determined Indigo was a small business. Contego appealed the size determination to OHA, alleging the area office did not adequately investigate Indigo. OHA agreed, finding the Area Office did not adequately investigate Indigo’s alleged affiliation under the ostensible subcontractor rule.
The SBA Area Office investigated, and again determined Indigo was a small business under the solicitation. Contego again appealed to OHA, alleging the Area Office clearly erred in its finding. OHA agreed, and found Indigo affiliated with its subcontractor under the ostensible subcontractor rule.
The ostensible subcontractor affiliation rule is a two-prong test. Violation of either prong of this test results in a finding of affiliation with the subcontractor. Before we take a look at OHA’s decision in Contego, we need to take a look at the rule itself.
One prong of the rule is whether a prime contractor unusually reliant or dependent upon its subcontractor. OHA has identified four factors: (1) whether the prime is the incumbent contractor, (2) will the prime hire the large majority of its workforce from the subcontractor, (3) did management of the prime previously work for the subcontractor, and (4) does the prime lack relevant past experience.
The other prong is will the prime contractor perform the primary and vital requirements of the contract?
OHA affirmed the ostensible subcontractor rule requires a review of both the undue reliance factor as well as which entity will be performing the primary and vital contract requirements. OHA considered the issue in two decisions that we’ll refer to as Contego 1 and Contego 2. We blogged previously on Contego 1, now we take a look at the ostensible subcontractor rule as it fit into OHA’s decision in Contego 2.
In Contego 1, OHA ruled the Area Office did not adequately investigate both prongs of the ostensible subcontractor affiliation test. The SBA area office investigated the first prong, and found that Indigo was not unduly reliant upon its subcontractor. The Area Office stopped there, however, and did not address whether Indigo would perform the primary and vital requirements of the contract.
OHA remanded the matter back to the Area Office to investigate both prongs of the ostensible subcontractor rule test. Additionally, OHA was quite concerned with the fact that Indigo’s manager would not be on-site. In Indigo’s original proposal, the on-site management would be delegated to the subcontractor.
The SBA area office re-investigated the matter, giving Indigo an opportunity to submit additional information. Indigo picked up on OHA’s concern regarding on-site management, and submitted a sworn declaration saying the project manager would be on-site. The new size determination finding Indigo small was appealed to OHA, and thus we get Contego 2.
In Contego 2, OHA cut through all of the procedural history and pleadings, simply finding Indigo ineligible under the ostensible subcontractor rule. OHA cast aside the sworn declaration by Indigo in response to Contego 1, finding it was too late to fix such a deficiency.
OHA reaffirmed that compliance with the ostensible subcontractor rule is assessed as of the submission of the proposal. As OHA reiterated, “documents created in response to a protest may not be used to contradict an offeror’s proposal.” Indigo made no mention of the prime contractor being on-site or involvement in the day to day management of the contract in its original proposal. OHA found this was a fatal flaw in Indigo’s proposal that could not be fixed with additional explanation after the fact.
To avoid having two left feet in the ostensible subcontractor rule, you must meet both requirements under the ostensible subcontractor rule. First, ensure that the proposal addresses how the prime contractor will fulfill the primary and vital requirements of the proposal. Second, the prime contractor needs to show it will not be unduly reliant upon its subcontractor.
Submitting a proposal is a delicate dance, especially when you get only one chance. If you step on toes, you can end up on the sidelines watching others get to dance in your place. When thinking of the ostensible subcontractor rule, make sure you do the two-step in your proposal.
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